Death, Divorce, and Bankruptcy

There is an old saying that goes, “Hope for the best, but plan for the worst.” In other words, sometimes in life the unexpected can happen, including such things as death, divorce, and bankruptcy. The following section outlines the potential outcomes of these unexpected events, and how they can impact your TFSA accounts.

Note: When designing your estate plan and in anticipation of these three events, professional advice should be sought to ensure that you make the correct choices.

Death

In the event that a TFSA holder dies, how their TFSA property will be distributed, transferred, and possibly taxed is influenced by their chosen designation of a beneficiary.

When planning your designation of a beneficiary for your TFSA account, you should understand the different types of beneficiary designations and the resulting outcomes upon your death. (See our section Designating a Beneficiary for greater detail.)

At the time of your death, the tax-free nature of TFSA accounts ceases immediately before the date of death. You are not required to include the value of your TFSA in your Date of Death Income Tax Return, but all TFSA earnings from the date of death onward, from your TFSA assets, becomes taxable. The only exception to this rule is where you appoint a surviving spouse or common-law partner as the designated beneficiary or Successor Holder of your TFSA account.

The designation of a beneficiary will dictate which of the following:

whether or not the deceased’s TFSA continues to exist or it is considered to cease

how income earned and investment gains after the date of death are reported and taxed

whether a beneficiary can transfer all or a portion of the assets received into their own TFSA, within limits, and

whether a transfer of assets from the deceased’s TFSA are classified as a contributions and thus subject to the beneficiary’s own TFSA contribution limits

In addition, if you designate a TFSA beneficiary, other than your estate, in the account documentation, then the fair market value of the deceased’s TFSA is not included as an asset of the deceased’s estate and no probate fees are payable.

Unused Contributions

Unlike unused RRSP contributions at the time of death, there are no provisions that allows for the deceased’s legal representative to contribute to the deceased's TFSA account, and there is no such thing as a spousal TFSAs. So, unused TFSA contribution room at time of death would be lost.

Divorce / partnership breakdown

In the event of a marriage or common-law partnership breakdown, a portion or all of a TFSA can be transferred from one individual to another without impacting either person’s contribution room.

Transfers between parties resulting from a relationship breakdown are classified as Qualified Transfers and, as a result, will not reduce the recipient’s unused TFSA contribution room. Because the transfer is not considered to be a withdrawal, the transfer will not be added to the unused TFSA contribution room for the party making the transfer.

Note: If the party making the transfer does not make a direct transfer to the receiving individual, but rather withdraws and then pays the dollar amount, then the amount of the withdrawal is added to the their unused TFSA contribution room and they can re-contribute in the following year. The receiving individual will only be able to contribute the received payment up to their personal limit on unused TFSA contribution limit. This type of transaction would benefit the transferring individual and would be to the detriment of the receiving individual.

For the transfer between separating parties to be classified as a Qualified Transfer, the following conditions must be met:

You and your former spouse or common-law partner must be living separate and apart at the time of transfer.

You are entitled to receive the transfer amount by way of a decree, court order or judgment, or a separation agreement.

The transfer must be made directly between the two TFSA accounts.

Note: The transfer will not eliminate any excess TFSA amounts, if applicable, in the taxpayer’s TFSA.

Bankruptcy

In the event you file for bankruptcy, your TFSA assets are not protected from your creditors. Unlike registered accounts, TFSA accounts have no protection from the bankruptcy process.

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